One eye on Ottawa, one eye on Washington as Canadians eagerly await federal budget
OTTAWA The fiscal focus in Canada has quickly turned from the federal government’s economic update last week — which changed little — to what will actually be in the federal budget next week.
In both cases, a lot still depends on what happens south of the border in the coming year or two.
“You’ve got stuff like tax reform in the U.S., carbon tax, (increases in) minimum wages (and) you’ve got NAFTA uncertainty. There are a range of things that are weighing on business sentiment,” said Jean-François Perrault, chief economist at Scotiabank.
For the federal budget, Canadians will be eyeing breaks to taxpayers and struggling companies.
For those who closely followed the last fiscal update in October, there was not much new to see in Friday’s update — a traditional semi-annual document that leans heavily on forecasts from the country’s top private-sector economists. The big picture will come Feb. 27, when the annual spending document is released in the House of Commons.
In normal times, the federal budget is a must-read — and that goes for this year’s document.
“It would be very prudent for the government to wait until we see if, in fact, there is evidence that what’s happening down south in the U.S. is having a detrimental effect on Canadian business,” said Perrault.
There’s an ongoing debate — reaching back as far as the 200809 financial/economic downturn — about where the so-called “neutral interest rate” should now be to keep the economy “growing at its potential and inflation staying on target,” Bank of Canada deputy governor Lawrence Schembri said in a speech last Thursday in Winnipeg.
That neutral rate “serves as a benchmark for us to gauge the degree of monetary stimulus in place and provides a medium- to long-run anchor for the policy rate,” Schembri said, and which is “consistent with the economy growing at its potential and inflation staying on target.”
The Bank of Canada’s current estimate of the neutral rate is between 2.5 and 3.5 per cent, down from the three-to-four per cent range of only a few years ago. That’s still a far cry from the current benchmark lending rate of 1.25 per cent, but also well off the near-zero levels in wake of the global recession. So, what now? Perhaps more co-ordination like that of the last recession “when both aggressive monetary and fiscal stimulus were used, highlighted the benefits of simultaneous policy action.”
Reversal of factory fortunes: Sales by Canadian manufacturers declined by 0.3 per cent to $55.5 billion in December, coming after a upwardly revised 3.8-per-cent increase in November — marking a five-month string of increases. According to Friday’s report from Statistics Canada, much of the drop was due to weaker sales in the petroleum and coal products industry and the food manufacturing industry.
Of the 21 industries tracked by the federal data agency, 11 of sectors — about 57 per cent of manufacturing outlets — lost ground. Sales of non-durable goods declined 1.3 per cent, but durable goods rose were up 0.7 per cent. Overall, December sales were down in seven provinces during December, New Brunswick and Quebec being the hardest hit reported the largest declines, which were partly offset by higher sales in Ontario and Alberta.
“The surge in November, related to a rebound in automotive shipments after the October shutdowns, was not expected to continue through the year-end,” said Michael Dolega, senior economist at TD Economics. Still, “rising protectionist sentiment, including the resurgence of ‘Buy American’ pose a downside risk for the sector, with the ongoing NAFTA negotiations hanging like a storm cloud over the outlook.”
Sales in Canada’s two traditionally hottest housing markets cooled significantly in January as tighter lending rules from the Office of the Superintendent of Financial Institutions kicked in at the start of 2018. Overall, existing home sales fell 14.5 per cent in January after ending last year with five consecutive monthly increases.
Toronto sales plunged 26.6 per cent in January and Vancouver transactions pulled back 10.5 per cent.
Calgary and Edmonton home sales were still down last month from December, “but most metrics still point to a soft and relatively stable market to start the year, ignoring the OSFI-related swing,” said Robert Kavcic, senior economist at BMO Capital Markets.
The Bank of Canada will be crunching economic numbers and gauging movements in other sectors ahead of its March 7 meeting. However, it’s unlikely Governor Stephen Poloz and his policy team will see any pressing need to add another quarter-point increase to the bank’s trendsetting lending rate, now at 1.25 per cent where it has been since Jan. 17. The next rate decision comes on April 18 and will include the bank’s Monetary Policy Report, a quarterly economic outlook and analysis.